Rupee rally could be short-lived: experts
The rupee strengthened for the second consecutive session to hit a fresh 16-month high against the US dollar on the eve of a widely anticipated US Federal Reserve rate hike. Investor sentiments have been boosted after results over the weekend showed that the ruling Bharatiya Janata Party (BJP) scored an overwhelming win in Uttar Pradesh. The victory was widely seen as a strong endorsement of Prime Minister Narendra Modi's agenda. However surprisingly, traders said that the Reserve Bank of India remained out of action, letting the demand and supply dynamics decide the rupee level.
The rupee closed at 65.6850--a level last seen on November 4--against its opening of 65.76 against the dollar. The rupee’s previous close was 65.82. The dollar-rupee market traded down during the European trade tracking the movement in the spot pair even as investors awaited for the outcome of the two-day FOMC meet that began on Tuesday and is expected to announce a rate increase later during the day.
Anjana Kovoor, vice-president at Mecklai Financial Services, said, “The rupee and the equity market have been rallying on account of favourable domestic sentiment with a strong win for the BJP in the state assembly elections. The rupee has appreciated an unprecedented 120 paise in just two days, though there is no real fundamental basis to support this.”
“Clearly RBI seemed to have taken a back seat on intervention and mopping up the excess flows, probably because they see the risk of global events ( the FOMC meeting and the European elections) pushing the rupee back on a depreciating bias, soon enough. Secondly, there is an adequate level of forex reserves and macro economics conditions have improved enough to allow for some volatility in the rupee,” added Kovoor.
“A stronger dollar seems a high possibility now that the Fed has already indicated a steady pace of rate hikes, this year given that their targets on inflation and unemployment rate is almost met at the start of the year. The rupee meanwhile has to contend with a big trade deficit, slow FDI flows in equity and negligible in debt. I expect the depreciating bias to return with a vengeance soon enough and in the near to medium term could see the rupee trading anywhere between 66.00 and 68.00 levels,” added Kovoor.
Commodity prices could push against rupee appreciation. Rating agency Icra said that it expects higher imports of crude oil and gold to widen the Indian current account deficit to $30 billion in FY18 from $20 billion in FY17.
Market attention will be squarely focused on Fed chair Janet Yellen's comments to gauge the future path of interest rates. The rupee is Asia’s only gainer against the US dollar this month as emerging market currencies remained under pressure in the face of a Federal Reserve interest-rate increase.
Falaknaaz Syed